A competitive firm currently produces and sells 7,500 units of output at a price

Question

A competitive firm currently produces and sells 7,500 units of output at a price of $2.50 per unit. The firm’s average fixed cost is $0.75 and its average total cost is $2.80. b. In the long run, should the firm continue to operate? Explain. c. In the long run, what do you expect to market price in this industry? Explain. A competitive firm currently produces and sells 7,500 units of output at a price of $2.50 per unit. The firm’s average fixed cost is $0.75 and its average total cost is $2.80. b. In the long run, should the firm continue to operate? Explain. c. In the long run, what do you expect to market price in this industry? Explain. A competitive firm currently produces and sells 7,500 units of output at a price of $2.50 per unit. The firm’s average fixed cost is $0.75 and its average total cost is $2.80. b. In the long run, should the firm continue to operate? Explain. c. In the long run, what do you expect to market price in this industry? Explain.

Explanation / Answer

Q

P

AFC

ATC

TC

TR

Profit

7500

2.5

0.75

2.8

21000

18750

-2250

b. As the profit is negative because of price less than ATC, in the long run the firm should exit in order to avoid losses

c. In the long run, many inefficient firms would exit from the industry which leads to reduced supply. For the reduced supply the demand would increases which would increase the price

Q

P

AFC

ATC

TC

TR

Profit

7500

2.5

0.75

2.8

21000

18750

-2250

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